Economy continues to threaten community banks

Weak loan demand and low rates take toll across region

Sep. 26, 2013

Written by

Jamie McGee

The Tennessean

Community banks in the southern region are showing signs of improvement, but they continue to face income pressure tied to reduced loan demand and low interest rates, according to the Office of the Comptroller of the Currency.

Banks have higher capital levels and more money available for loans, based on an analysis of financial data through the second quarter, officials said Wednesday.

More than 80 percent of the 511 community banks in the nine southern states received the highest level of rating, compared with 70 percent in 2011, according to the comptroller’s office.

The report demonstrated the challenges that local community banks are facing, even as Tennessee has recovered more quickly than states more severely damaged by the housing market collapse, such as Florida and Georgia. Nashville, in particular, has ranked among top-performing cities for its economic rebound, but as new banks have entered the market in recent years, the increased money supply has weighed on pricing, officials said.

“(Nashville has seen) a pretty good recovery, but loan demand is still pretty weak,” said Kent Cleaver, president of Avenue Bank. “We have a high density of banks per capita here, so there is a lot of competition looking for the relatively few good credit opportunities in the marketplace.”

In the past two years, Louisville-based Republic Bancorp, Los Angeles-based City National Bank and Landmark Community Bank, based in the Memphis area, are among banks that expanded into Nashville. Meanwhile, Birmingham-based BBVA and Georgia-based United Community Banks are seeking to expand their presence in Nashville.

“Everybody and their brother is coming to Nashville from a banking standpoint,” said Jim Rieniets, CEO of InsBank. “You have all these banks opening up loan-production offices and you have money from all over the country thrown at Nashville. Too much money means low rates and loose credit. ... We are definitely seeing pricing under pressure.”

That pricing competition means more leverage for borrowers as banks try to retain customers, said Gil Barker, deputy comptroller of the OCC’s southern district.

“The best borrowers hold the cards right now,” Barker said. “They are in the position to take their lending needs to different institutions and everybody is looking for the opportunity to grow loans. ... Community bankers, in particular, have to make some real tough decisions about their underwriting standards to keep and maintain customers, as well as to attract new businesses.”

Barker said the comptroller’s office is beginning to see underwriting standards loosened and loan maturity dates extended as banks look for ways to confront the challenging marketplace. He cautioned banks to make sure they have the proper controls in place before pursuing new — and often unfamiliar — business lines.

“Our concern here is that the anxiety for income that exists today will lead to improperly managed concentration levels or expansion of products that were at the heart of the last downturn,” he said.